BOJ policy tweak prospects jolt Japanese markets, yen

TOKYO (Reuters) - Japan’s yen hit two-week highs against the dollar and the 10-year benchmark bond yield jumped to a six-month peak on Monday, following reports the central bank was debating moves to scale back its massive monetary stimulus.

FILE PHOTO: U.S. Dollar and Japan Yen notes are seen in this June 22, 2017 illustration photo. REUTERS/Thomas White/File Photo

Also pushing the yen up were comments by U.S. President Donald Trump’s on Friday criticising the greenback’s strength, which in turn knocked Japanese exporter stocks and the benchmark Nikkei index lower.

Sources on Friday told Reuters the Bank of Japan is holding preliminary discussions on possible changes to its monetary policy, which include adjustments to interest-rate targets and stock-buying techniques and focus on ways to make the massive stimulus programme more sustainable.

The report on the BOJ’s deliberations has heightened expectations the central bank would end some of its aggressively accommodative monetary policy, which lifted the 10-year yield as much as six basis points to 0.090 percent JP10YTN=JBTC, a level not seen since early February.

Shifting market views on Japanese policy come as other major central banks move away from low interest rates and as trade frictions between the United States and its major trading partners worsen.

“Whatever explanation the BOJ makes, if it makes policy adjustments that will lead to higher rates, that will make market players aware that the BOJ is in the phase of withdrawal from its massive stimulus,” said Takafumi Yamawaki, head of currency and fixed income research at J.P. Morgan Securities.

FILE PHOTO: A Japanese flag flutters atop the Bank of Japan building in Tokyo, Japan, September 21, 2016. REUTERS/Toru Hanai/File Photo

The spike in the 10-year yield prompted the central bank to activate a rarely used special bond buying operation, which pushed the yield back from its intraday high. The BOJ through the market operation pledged to buy 10-year JGBs at a yield of 0.110 percent, the same level at which it has intervened in the past.

Still, the prospect that the BOJ could adjust its current policy framework as early as its next meeting next week unsettled investors who have grown accustomed to the BOJ’s stimulus.

The 10-year JGB futures price fell 0.41 point 2JGBv1, matching their biggest single day decline since the BOJ announced the current policy framework of “yield curve control” on Sept. 21, 2016.

The BOJ’s policy now consists mainly of negative short-term interest rates, keeping the 10-year yield around zero percent and buying about six trillion yen of stocks through exchange traded funds (ETFs).

On the other hand, Fast Retailing shares (9983.T) dropped 5.7 percent and other heavyweights in the Nikkei share average .N225 tumbled as traders expected the BOJ to reduce buying in the Nikkei-linked ETFs.

The BOJ’s buying in the Nikkei ETF has led the BOJ to own a large chunk of its large components, such as Fast Retailing and Fanuc (6954.T), leading to scarcity of shares in the market.

Exporter stocks slid on the currency’s appreciation with Toyota Motor Corp (7203.T) off 1.7 percent, Shin-etsu Chemical (4063.T) 1.9 percent and Panasonic (6752.T) 1.2 percent. The Japanese yen rose to a two-week high of 110.75 per dollar.

BOJ Governor Haruhiko Kuroda started massive bond buying in 2013 with an aim to eradicate deflationary pressures and boost prices.

But Japan’s inflation is seen as unlikely to reach the BOJ’s 2 percent target even after the central bank, which frequently buys more JGBs than the government issues, soaking up more than 40 percent of government debt.

The central bank has been gradually reducing its bond buying since September 2016, when it set a policy target of zero percent in the 10-year JGB yield, relegating its quantitative bond buying target to a secondary role.